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Risk-Bearing and the Theory of Income Distribution

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  • Abhijit Banerjee
  • Andrew F. Newman

Abstract

This paper develops the stochastic theory of distribution with a dynamic model that focuses on the role of incomplete insurance in generating inequality. Unlike previous work, the authors' approach takes explicit account of the reason for market incompleteness in modeling agents behavior; in particular, the amount of risk borne is endogenous. Using a model of growth with altruism in which agents are risk-averse and there is moral hazard, they show that lineage wealth follows a Markov process which converges globally to an ergodic distribution; this also represents the long-run population distribution of wealth. The authors discuss the role of particular assumptions. Copyright 1991 by The Review of Economic Studies Limited.

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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 877.

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Date of creation: Oct 1989
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Handle: RePEc:nwu:cmsems:877

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